In this guest post, EEP highlights the different business models for solar PV development in southern and eastern Africa.
The Energy & Environment Partnership programme (EEP) is a challenge fund active in southern and east Africa. Since 2010, EEP has assisted over 200 renewable energy and energy efficiency projects in the region with grant funding during their early stages of development and implementation.
A wealth of knowledge has been created through the implementation of these projects. This article focuses on EEP supported projects in the solar PV sector in east Africa.
The fifty solar PV projects included in this analysis typically use one of the following business models:
1) Retail/Over the Counter – Where in the past solar products were typically sold as an additional product within a larger business, recently a large number of dedicated solar retailers have emerged. Their survival and success is dependent on effective marketing, supply and distribution models.
2) Pay-As-You-Go (PAYG) Consumer Financing – This is effectively a consumer financing model that takes advantage of mobile money systems and combines this with remote monitoring and control of solar systems to remotely disconnect a system in the event of default. Ownership of the system is transferred once the customer finalizes their repayments. The model offers flexible customer repayment options and enables the business to easily and effectively manage a large portfolio of dispersed borrowers. With repayments typically ranging from 6 months to 3 years, proper cash flow management is essential.
3) Consumer Financing (via Partner Financial Institution) – In partnership with a financial institution the PV supplier provides products and associated services while the financial institution provides the consumer financing and collects repayments.
4) Mini/micro-grid – The main advantage of mini grids over stand-alone solar systems is their ability for connected customers to increase their power and energy consumption without having to invest in additional capacity. They are technically most effective when a large number of customers can be connected within a short radius.
5) Fee-for-Service – An approach based on customers paying a monthly fee for electricity services, similar to a utility model, but using stand-alone systems. Ownership of the system is not transferred to the customer with the business responsible for maintenance. This model is well suited to providing electricity to dispersed communities, where large distances between customers make mini/micro-grids unviable. However, a significant upfront cost has to be borne by the business and the payback period is relatively long.
The analysis determined that different models are suited to different market segments as demonstrated by the comparison of delivery models and product/service pricing in the table and figure:
- The retail model is best suited for task lighting products (tier 0.5);
- The PAYG and consumer financing models are suited for general lighting and phone charging systems (with or without TV) (tier 1.5 & 2) and;
- The fee for service model is suited for tier 0.5 and tier 1 (especially where income levels are very low and customers cannot afford outright purchase of a task light). It is also well suited for tier 2.5 and 3 (when PAYG becomes too expensive for large solar PV systems).
It was also found that mini/micro-grids can provide the spectrum of electricity services at a lower cost than other business models. However, they can only be implemented in locations with high population density.
Although it has potential, the fee-for-service model is very difficult to run sustainably on a fully commercial basis. Some level of financial support will be required to deliver a certain volume of systems, at which point sufficient revenues can be collected from existing customers to sustainable finance operations and expansion. It is also important to note that where there is competition between PAYG and fee-for-service solutions, customers prefer the PAYG option as that will result eventually in ownership of the system.
Need for financial support to establish the sector
Insight gathered during the course of the study has led to the identification of the following areas at which financial support could be targeted in support of the development of the sector:
- Identification, training, recruitment and support of rural based staff/agents providing sales or after sales services for retail and PAYG models.
- PAYG businesses assess risk by analyzing the payment patterns and customer characteristics of their existing portfolio and use this to quantify the default risk for the future portfolio. In new countries/markets soft funding to establish this initial portfolio of customers would help in minimizing the commercial risk to the PAYG business and would thus possibly enable accelerated private investments in the sector.
- Soft funding for innovations in PAYG delivery models and/or products that significantly reduces the repayment fees would contribute to making off-grid solar PV solutions affordable for low income segments of the population.
- Large regions in some countries (especially where markets are considered difficult) still remain unserved or underserved and incentives are sometimes required to support businesses implementing retail and PAYG models to develop, support and grow distribution networks in these areas.
- The fee-for-service model can be very effective in providing electricity access in areas that are not viable for grid extension or mini-grids (due to low population density). It has demonstrated the ability to provide higher levels of service at costs lower than PAYG model (thereby providing an alternative for consumers who cannot afford PAYG) as well as providing continuous maintenance services. However, the model has high capital/investment requirements and a long payback period and therefore requires some form of subsidy to attract commercial investors.
- To be commercially interesting, a mini/micro-grid business needs tens to hundreds of thousands of customers. Considering access to finance and commercial viability challenges, it will be challenging for private mini/micro-grid developers to scale to these levels without a sustained stream of soft-financing. Some dedicated long-term source for soft funding (not unlike rural electrification funds) will be required to support private mini-grid developers if they can demonstrate that they are more effective than public utilities or rural electrification authorities.
EEP Investor Forums
In total, the EEP Programme has supported over 200 projects in southern and east Africa out of which 39% use solar PV technology, in their early stages of development. With the grantees completing their activities under the EEP funding, the programme is assisting them in preparing for new funding rounds. Part and parcel of this are the Investor Forums organized by EEP in which EEP grantees that are ready for new investments present their case and unique selling points to potential investors in their companies and / or projects. The next EEP Investor Forum will be held in Nairobi on May 30, 2017.